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Discovery Communications Earnings Drop Following Its Merger With Scripps Networks

The TV network believes its larger platform will speed up sales growth and eventually offset the short-term costs of the merger.

Discovery Communications (NASDAQ:DISCK) this week announced its first quarterly report since closing its $13 billion merger with past rival Scripps Networks. The acquisition powered strong sales growth for the combined TV network, but also caused a sharp increase in costs that sent profits lower.

Here's how the headline figures compare against the prior-year period:

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$2.3 billion

$1.61 billion

43%

Net income

$3 million

$221 million

(99%)

Earnings per share

($0.01)

$0.37

N/A

Data source: Discovery's financial filings.

What happened this quarter?

Sales spiked higher by 43% as the company rolled the Scripps Networks business into its reporting. Earnings sank to a modest loss due to temporary costs associated with the transaction.

Image source: Getty Images.

Highlights of the quarter included:

The U.S. segment expanded by 42%, or 3% after excluding the impact from new business acquisitions. That 3% uptick was driven by a 2% increase in distribution fees and a 4% gain in advertising sales. Both figures marked a significant slowdown from the prior quarter. Discovery's overall subscriber base fell by a painful 5% as customers continued to move away from the broadcast TV ecosystem.

After adjusting for temporary charges from the merger, profitability declined in the U.S. segment due to rising content spending and digital media production costs.

Discovery's international business logged a 47% sales gain that amounted to 28% on an organic basis. The revenue spike came from a double-digit increase in both distribution and advertising revenues. Discovery also booked a major sales gain tied to licensing of Olympics sports broadcasts in Europe.

Expenses rose at a far faster pace than revenue in the international division due to the timing of costs associated with the Olympics.

Free cash flow fell to $112 million from $160 million a year ago as Discovery spent more money servicing its debt and executing the Scripps Networks merger transaction.

What management had to say

Executives focused their comments on the Scripps Networks merger and how that acquisition should improve Discovery's market position in an industry that's going through a big disruption. In a press release, CEO David Zaslav said the deal's closure made the first quarter a "historic and pivotal period for Discovery."

"We closed on our transaction to acquire Scripps Networks, becoming the global leader in real life entertainment and home to an enhanced portfolio of quality and trusted enthusiast brands," Zaslav said.

With the company's new position controlling one of the biggest pay-TV content portfolios, management says they're optimistic about growth potential. "As our industry continues to evolve we are uniquely positioned to maximize the value of our traditional pay-TV business while driving new opportunities and growth from our digital and direct to consumer businesses around the world," Zaslav said.

Looking forward

As these latest results demonstrate, the Scripps Networks transaction will have a mixed impact on Discovery's short-term finances. The extra sales base it provides, particularly in international markets, is good news, while the elevated merger and interest costs threaten to drag down profits at least through 2018.

Management is hoping that the new business will be better able to secure higher advertising and distribution revenues even as the subscriber base for broadcast television continues to dwindle. Now it's up to the company to execute on that bold long-term plan.